Bear Spreads

A trader wants to set up a bear spread with either call options or put options, with these two exercise prices: | Exercise Price | Call Option Premium | Put Option Premium | |-----|----|----| | 150 | 10.52 | 2.85 | | 160 | 3.87 | 6.18 | If maximum profit will be achieved, the use of call options for the bear spread will earn the trader:

Correct! This can be seen by calculating the profit in each position. For call options, maximum profit is earned when price is low enough for both options to expire worthless. The trader would sell the 150 call and buy the 160 call, obtaining the difference as the maximum profit of $$ 10.52 - 3.87 = 6.65 $$. Using put options, the trader would purchase the 160 put and sell the 150 put, hoping that the underlying price is low enough to gain the exercise price spread of 10. This will more than pay for the option premium difference. The maximum profit in this case is: $$\displaystyle \Pi = X_2 - X_1 - p_2 + p_1 = 160 - 150 - 6.18 + 2.85 = 6.67 $$ So the bear spread with the call options will earn a slightly lower profit than the bear spread with the put options, given this maximum profit assumption.

Incorrect. Start by calculating the profit of the bear spread using call options as the difference of the premiums, or 6.65. Then consider what the payoff would be with the put option structure.

Incorrect. Calculate the percentage returns on both, and you'll find that they differ. Be sure to start with the premium differences, recognizing that one profits most from both options expiring worthless.

a lower profit than by using put options.

a greater profit than by using put options.

the same profit as would be earned by using put options.